Unless we change the way we live, global warming and destruction of the environment will destroy our businesses, families and communities. The IPCC (United Nations Intergovernmental Panel on Climate Change) is predicting that a world with 2°C of global warming will lead to more heat-related deaths, smaller crop yields, worse extreme weather events, slower economic growth, more people in poverty and mean that 50 per cent more of the global population faces water stress, compared to a 1.5°C increase (Climate Change report - October 2018).
Risks to the environment are also risks to businesses, therefore affecting banks' users and clients. Any bank that is serious about limiting climate change started work on this many years ago.
Sustainable finance at ING
Five years ago, ING decided to integrate sustainability into its commercial strategy. It now actively works with corporate clients to support them in the transition to tomorrow’s economy, offering sustainability programme support for a range of sectors, including: utilities, shipping, property, renewable energy and technology. The bank has sustainable assets under management, is a major issuer of green bonds, scores highly compared to peers on sustainability indices and offers sustainability-improvement loans. Its green credentials include the following:
- Sustainable assets under management increased to EUR 4.8 billion in 2017, up by EUR 1.1 billion from 2016.
- Scores 85 out of 100 from sustainability research leader Sustainalytics and scores 89 out of 100 in the Dow Jones Sustainability Indices, compared to an average industry score of 58.
- Issued eight sustainable bonds and one syndicated facility in Asia in Q1 2018.
- Ranks second in the euro green bond league table and first in Bloomberg's green loan league table.
- Offers sustainability-improvement loans in which the percentage rate is linked to how well the project performs from a sustainability point of view.
- Does not invest in new coal projects (apart from some existing commitments awaiting maturity).
- It does not invest in controversial weapons.
- It actively help clients to transition their portfolios to meet the below-2-degrees targets of the Paris Agreement.
Leonie Shreve, ING’s global head of sustainable finance established the bank's sustainability function, which is now part of the commercial strategy of the whole bank. She explains the overall strategy: “We believe sustainable business is better business and by focusing on forward-thinking companies that are driving change to become more sustainable, we will have a positive impact on business in the long term. By supporting clients as they are future-proofing their business, we are future-proofing ours.”
Last year, ING launched its sustainability improvement loan, which ties the margin to sustainability performance. If the sustainability rating goes up compared to the level agreed upfront, then the interest rate goes down, and similarly if the rating declines the interest rate goes up. This creates price differentiation and Shreve claims that this "really gets CFO and corporate treasurer attention”.
Benefits for corporates
Corporate customers are benefiting from the bank's sustainable financial offerings and are seeing that green products also provide a good return on investment. Shreve says: “Also companies with higher sustainability ratings have better performance and so have been able to shift their business as the market changes.”
Sustainability programmes also drive broader change within the corporates that use them. For example, they can attract employees with an interest in this area, particularly millennials. They can also generate empathy from existing staff. They also focus attention on internal energy efficiency, such as ways to use less water.
Investor demand is also driving the market for green finance, with increasing numbers of investors growing their sustainable portfolios. The investor base is becoming increasingly diversified and this means green issuers are benefiting from better pricing.
ING, and the financial sector in general, has been working for several years on a way to measure the climate impact of its lending portfolio. Previous methods were backward-looking and based on assumptions. Now it has developed a new approach, called the Terra approach, in conjunction with a leading climate change think tank, 2˚ Investing Initiative. The Terra programme was launched at the IPCC meeting in San Francisco to provide metrics on how the use of financial technology must change to keep in line with Paris Agreement goals. It focuses on high-emission sectors, such as: energy (including oil, gas, renewables and conventional power), automotive, shipping & aviation, steel, cement, residential mortgages and commercial real estate. Overall, Terra enables ING to steer the bank and its clients towards alignment with key climate goals.
Terra aims to provide the following types of metrics:
- data on what technology changes are needed and by what date;
- sector-specific scenarios from independent organisations such as the International Energy Agency;
- data on investment plans in the transitioning energy mix of companies, from databases that track public and private companies of various sizes around the world. (This means that corporate clients aren’t burdened with extensive requests to provide data to ING.)
The Terra model is open source and ING is already in talks with other banks and stakeholders about using the system. According to ING, most banks approve the methodology and recognise that they would benefit from having an industry-wide standard. This could increase transparency about banks' progress in fighting global warming and the banks’ collective effectiveness in fighting climate change.
ING believes that the Terra approach can change the way banks think about energy transition. Shreve says that, compared to other measurement approaches, “this one is precise, forward-looking, and will ultimately have a bigger impact because it steers key sectors towards technologies that underpin a low-carbon future rather than only measure a carbon-rich past.”
CTMfile take: ING is to be congratulated on its overall approach to global warming, and for trying to develop a bank-wide standard for measuring and and assessing its global warming impact. This standard is desperately needed, but will corporate treasurers and CFOs really support these types of initiatives?
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